Final Rules Govern Election out of Centralized Partnership Audits: Eligibility for, and the Mechanics of, the Election Are among the Areas Covered

Article excerpt

The IRS issued final regulations that implement the rules for electing out of the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015, RL. 114-74, and amended by the Protecting Americans From Tax Hikes Act of 2015, P.L. 114-113. The regulations apply to partnership tax years beginning after Dec. 31, 2017, which is also the effective date of the new audit rules. All of the rules were issued in proposed form in June 2017. The IRS finalized the election-out rules separately from the other rules (see "Centralized Partnership Audit Rules Are Reissued in Proposed Form," available at tinyurl.com/ydcwcyp8, for more on the proposed regulations).

The comments the IRS received on the proposed regulations for electing out covered three areas: determining the number of partners to determine whether the partnership has 100 or fewer partners under Sec. 6221(b) and is therefore eligible to elect out; determining which partners are eligible partners for purposes of making the election out; and the mechanics of making the election out.

Under the final regulations, partnerships that are required to furnish 100 or fewer Schedules K-l, Partner's Share of Income, Deductions, Credits, etc., and of which all of the partners are "eligible partners" can elect out of the new audit regime. Special rules determine the number of partners when a partner is an S corporation. Under the final rules, the number of shareholders of the S corporation partner are taken into account in determining the 100-or-fewer threshold. Another provision counts partners who are married as two separate partners because Sec. 6221(b) does not require them to be treated as one partner. The IRS received a number of comments regarding the determination of the number of statements to be furnished, but it made only clarifying changes to an example in the final regulations based on the comments.